The American Journal of Economics and Sociology

Segda, Issa; Diarra, Mahamadou

doi: 10.1111/ajes.70057pmid: N/A

This article examined the direct and indirect effects of financial development on macroeconomic stability as measured by the volatility of GDP per capita in ECOWAS over the period 1981–2020. Unlike previous studies that use the standard deviation of the variables to measure volatility, this study considers the standard deviation of the random component extracted from the estimation of a first‐order autoregressive process for the variables. Using CS‐ARDL modeling to account for the characteristics of our panel, the empirical results reveal that financial development, measured by domestic credit to the private sector, has a direct negative and significant effect on growth volatility in the ECOWAS region in the long run. In addition, financial development has an indirect effect on macroeconomic stability through its effects on real and monetary shocks. It attenuates real shocks and, conversely, is a source of amplification of the effects of monetary shocks on macroeconomic volatility in ECOWAS. The policy implications suggest that focusing on financial development is a way for ECOWAS policymakers to reinforce the macroeconomic stability of the zone. It is also crucial to promote credit diversification by encouraging banks to support promising and resilient sectors while exercising greater prudence in the management of monetary policy.